4004 JP

Showa Denko KK

Industrial/Transportation


Presented:07/01/2020
Price:¥2,377.00
Cap:$2.90B
Current Price:¥3,855.00
Cap:$5.82B

Presented

Date07/01/2020
Price¥2,377.00
Market Cap$2.90B
Ent Value$4.64B
P/E Ratio8.12x
Book Value¥3,249.62
Div Yield5.89%
Shares O/S145.88M
Ave Daily Vol1,594,639
Short IntN/A

Current

Price¥3,855.00
Market Cap$5.82B
Showa Denko K.K. engages in the manufacture and sale of chemical products. It operates through the following segments: Petrochemicals, Chemicals, Electronics, Inorganics, Aluminum, and Others. The Petrochemicals segment produces and merchandises olefins and organic chemicals. The Chemicals segment manufactures and sells functional polymers, industrial gases, and basic chemicals. The Electronics segment covers hard disks, compound semiconductors, rare earth magnetic alloys, and lithium ion battery materials. The Inorganics segment deals with graphite electrodes and ceramics. The Aluminum segment manufactures and sells rolled aluminum products, aluminum specialty components, and beverage cans. The Others segment produces and sells silicon carbide epitaxial wafers and building materials. The company was founded by Nobuteru Mori in 1939 and is headquartered in Tokyo, Japan.

Publicly traded companies mentioned herein: GrafTech International Ltd (EAF), Showa Denko KK (4004 JP)

Highlights

In the presenter’s opinion, Showa Denko shares (4004 JP) represent an attractive short selling opportunity in the 2,300 - 2,400 JPY range. Over the last two years, the company’s core business - graphite electrodes, within the Inorganics segment - benefitted from a combination of strong demand and supply constraints, which led to unsustainably high prices. More recently, the growth of electric arc furnace (EAF) steelmaking has declined and graphite electrode pricing has collapsed. On top of the headwinds for its core business, Showa Denko made a very aggressive, $8.8B (>14x EBITDA) bid for Hitachi Chemical at the end of 2019; it is now trading at an estimated 8.7x leverage (pro forma 2020), and when Street models are updated to reflect the price paid for Hitachi and diminishing EBITDA/FCF, the stock could re rate lower (at 10x pro forma EBITDA, which is more than one standard deviation above the historic valuation, there’s greater than 50% downside risk to the stock in his opinion). Last, if fundamentals deteriorate as the presenter expects, Showa Denko’s ~5.9% dividend yield could be cut.

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